Suffer if you want, but there is such a thing as a free lunch

Ambrose Evans-Pritchard

Britain has just carried out one of the greatest victimless crimes in modern financial history. It is in effect wiping out public debt worth 20 per cent to 25 per cent of GDP – on the sly – without inflicting serious macroeconomic damage or frightening global bond markets.

Governor Mark Carney more or less acknowledged that the Bank of England will never reverse its £375 billion of Gilts [UK government bonds] purchases. Quite right too.

"Any unwinding of QE should come after several adjustments to rates," he told the Treasury Select Committee. The word "any" tells us what we need to know.

This follows comments by Deputy Governor Charlie Bean yesterday that the Bank will "only contemplate selling back Gilts once the recovery is on a firm path." He admitted that some holdings may never be sold.

The Bank has come a long way from the early days of QE when any such suggestion was treated as an outrageous smear. There was a mantra that helicopter money requires a hoover afterwards to vacuum it up.

But in a deflationary world there is no clear imperative to do so. The Bank can sit on its Gilts forever. These can be switched in zero-coupon bonds in perpetuity. The certificates can be put in a drawer and left to rot. The debt is eliminated in all but name.

Advertisement

If and when inflation starts to pick up again – not imminent – the Bank can raise interest rates to prevent overheating. Indeed, it is better to do this than unwind QE because this restores rates quicker to equilibrium levels, a boon to savers and a healthy brake on property speculation.

Foreign investors who sold their Gilts in 2009 or thereabouts lost 20 per cent (now below 15 per cent) on sterling's devaluation, but made a lot back from the rising nominal value of the bonds when rates collapsed to near zero. They didn't do too badly.

There has been a social cost within the UK. QE has been a huge net transfer from savers to borrowers. This is unjust, but ultimately a better outcome for society than driving borrowers to the wall in a replay of the early 1930s (or as the eurozone has done over the last five years). Governments should act in the interests of creditors alone. Britain has ended up with a rough balance between the competing interests of savers and borrowers. Unemployment has been much lower than it might have been.

Puritans and Calvinists are certain that there must be sting in the QE tail for Britain in the end. Perhaps so, perhaps the expanded money base will come back to haunt us, but such arguments mostly smack of religion, dogma, and psychological obsession. There is no such determinist force at work.

Can there really be such a thing as a free lunch in economics? We will never be able to prove it either way, but on balance it looks like the answer is yes.

I have to admire my friends in France, Italy, and Spain for sweating it out under ECB tutelage with scarcely a word of protest, but the result is that their public debt ratios are rising at a galloping rate despite deep fiscal austerity. Their jobless rates have gone through the roof.

They too could use a disappearing trick worth a 20 per cent – 25 per cent of GDP to reduce the load. Otherwise the pain will go on and on. Suffer if you want.